Silver Tsunami: Making the Case for Reverse Mortgages

It might seem strange to bring up reverse mortgages in a space dedicated to the lives of baby boomers.

After all, reverse mortgages have a reputation as being products used primarily by seniors. Jeff Lewis, chairman of Generation Mortgage, a reverse mortgage-only business in Atlanta, says those utilizing the product are on average in their early 70s. (Reverse mortgages can actually be utilized by homeowners starting at the age of 62).

Reverse mortgages also have another reputation as being products not just used by seniors, but by seniors who are desperate for income. Furthermore, reverse mortgages are seen as being complicated to understand. The industry has also come under the same scrutiny and criticism that has afflicted the mortgage industry as a whole, including accusations that loan officers are using unscrupulous tactics to generate commissions. In the case of reverse mortgages, this means preying on seniors.

“We have spent a lot of time in the industry fighting off what I think are fundamental misperceptions about what the product does and doesn’t do,” Lewis says “It’s our responsibility to do a better job explaining to people what the product can do and when it can be effective.”

But Lewis says people who are engaged in financial planning “have to look at the whole picture.” This means being aware of the extent to which there might be home equity available for a client. “For a lot of people the biggest part of their net worth might be their home equity and for a lot of people the biggest expense they expect to have over their lives is housing,” Lewis says.

So where does the boomer fit in this picture? Lewis argues that the reverse mortgage would be especially helpful as part of the financial planning discussion for boomers in the “sandwich generation,” of which he is a member. These boomers are struggling with expenses by caring for both children and parents. After the recession their retirement savings may be depleted. Their home isn’t providing the nest egg like it once did. Rather than going to their oldest children for a loan, these boomers might want to consider a reverse mortgage, Lewis says.

“It’s really important for the oldest children to see how a reverse mortgage enabled their parents retain their financial independence,” he adds. “It has an important social component. I think people feel better when they take care of themselves. Parents really don’t want to go to their kids for help. They’d rather do it themselves.”

Lewis says that five or 10 years ago children might have objected to their parents using a reverse mortgage because they were expecting to inherit the house. “But if you send your parents a check every month and then you get the house [when your parents no longer live there] what is that? That’s a reverse mortgage,” Lewis says.

When an advisor begins talking with a client about possibly utilizing a reverse mortgage, he first and foremost has to determine how much existing debt the client has on the house. If a client finds himself in a situation where he can barely cover everything by using a reverse mortgage, he’ll likely have problems paying his real estate taxes, home owner’s insurance, or keeping his house up. These are obligations he has to meet if he has a reverse mortgage or else he’s defaulting on the loan.

“It’s a very powerful tool but once you use it you can’t use it again,” Lewis says. “The industry is trying to make sure that the people who are using reverse mortgages aren’t in such a dire circumstance that they won’t be able to live up to the obligations they have after they do it.”

There is little argument that there has been a recent drop in the origination of reverse mortgages recently. Lewis notes that last October the principal limit factor (similar to a loan-to-value ratio on a normal mortgage) was dropped 10% and that has caused the market volume to drop 30-40% from last year to this year. It appears almost certain that there will be lower factors and higher mortgage insurance premiums this year as well, Lewis says. This could make it even more difficult to get people into a reverse mortgage.

But Generation Mortgage could be tapping into a new market not normally associated with reverse mortgages: The high net-worth homeowner. In the last few weeks the company has introduced two different fixed-rate jumbo loan products that are more for people with homes in excess of seven figures.

Lewis says the low market penetration for reverse mortgages could be due in part to the unfamiliarity that many advisors have with the products. Although he concedes that reverse mortgages are complicated, he says that doesn’t make them bad. All of the complications are features that end up working to the benefit of the consumer, Lewis argues. This includes the fact that you can have a fixed rate or you can have floating; you can receive that line of credit up front, or over time on a schedule. You can also take a lower coupon and pay higher upfront costs or you can take less upfront costs and take a higher accrual rate.

“I think the financial professional should take the time to learn these products because they can be a very powerful tool in enabling people to remain in their homes and remain financially independent as long as possible,” Lewis says.